EPAct 179D Experts

"The least expensive kilowatt, is the one not used."

- Jacob Goldman

EPAct Tax Aspects of WalMart's Supplier Sustainability Program

The EPAct and Alternative Energy Tax Aspects of Wal-Mart’s Supplier
Sustainability Program

Wal-Mart requires a huge volume of goods daily to fulfill its third-party
supply chain, and requires its suppliers to execute a Sustainable Supplier
Assessment as part of its commitment to cost reduction and sustainability.
Wal-Mart has three focused goals with this program:

(1) To Produce Zero waste

(2) To be supplied by 100% Renewable Energy and

(3) To sell sustainable products.

Wal-Mart makes it clear that it will "reward those suppliers who have
measured impacts and shown progress toward meeting aggressive sustainability
goals." Wal-Mart is a critical customer for many companies, large and small, so
that Wal-Mart suppliers throughout the country are working through their
Wal-Mart sustainably assessments. Wal-Mart suppliers can use a variety of tax
savings opportunities to reduce their investment costs as they begin to execute
their new sustainability improvements.

Section 179D

Code Sec. 179D, effective January 1, 2006 through December 31,2010, provides
an immediate tax deduction of up to $1.80 per square foot for building
investments that achieve specified energy cost reductions above ASHRAE
90.1-2001 building energy code standards. A one-time deduction $1.80 per square
foot deduction is the maximum tax deduction, but deductions of up to 60 cents
per square foot are also available for three types of building systems:
lighting, HVAC systems, and the building envelope.

Tax Credits/Cash Grants

Pursuant to Internal Revenue Code Section 48, companies or individuals
installing various qualifying alternative energy technology can utilize a
variety of 10% and 30% alternative energy tax credits. In addition, sections
1104 and 1603 of the American Recovery & Reinvestment Act of 2009 allow for
the taxpayer to take the tax credit in the form of a cash grant so long as
their energy retrofitting project qualifies. This energy retrofitting option is
exclusively made available for projects that have “begun
construction” during 2009 or 2010.

The U.S. Department of Treasury has recently issued guidelines in order to
clarify the meaning of construction that has “begun:” there needs
to have been actual physical work of a significant nature or, at a minimum,
there needs to be a binding contract in place that guarantees the construction
of a specified energy property. Also, once a property owner has paid 5% of the
total cost of installation of the energy property, the requirements of Section
1603 will generally be satisfied. Property owners desiring to lock in cash
grants should review the requirements carefully.

Understanding the 15 Sustainability Supplier Assessment Questions

Wal-Mart has developed 15 Supplier Assessment questions in four categories,
which are

1. Have you established publicly available sustainability purchasing
guidelines for your direct

suppliers that address issues such as environmental compliance, employment
practices and

product/ingredient safety?

2. Have you obtained 3rd party certifications for any of the products that
you sell to Wal-mart?

People and Community: Ensuring Responsible and Ethical Production

1. Do you know the location of 100 percent of the facilities that produce
your product(s)?

2. Before beginning a business relationship with a manufacturing facility,
do you evaluate the

quality of, and capacity for, production?

3. Do you have a process for managing social compliance at the manufacturing
level?

4. Do you work with your supply base to resolve issues found during social
compliance

evaluations and also document specific corrections and improvements?

5. Do you invest in community development activities in the markets you
source from and/or

operate within?

The Four Energy and Climate Questions

One of the best techniques to quickly reduce greenhouse gas emissions with a
high economic payback coupled with large tax savings is to upgrade facilities
to energy efficient lighting. It is particularly important to retrofit any now
federally banned metal halide and T-12 lighting to new energy efficient
lighting. Many Wal-Mart suppliers have manufacturing facilities and warehouses
where these prior generation lighting technologies are still prevalent. The
emission reduction computation from energy efficient lighting is
straightforward and easy to calculate. HVAC upgrades typically have a high
investment cost but often produce the best long term economic return. For
non-conditioned (heat only facilities), large EPAct tax deductions are
available if the heater upgrade occurs after or concurrently with the energy
efficient upgrade lighting upgrade .

Wal-Mart has actually gotten more “hands on” with supplier
energy reduction projects in what is called SEEP its "Supplier Energy
Efficiency Program." Some of the companies that have participated in this
program are: Burlen, Intradeco, Komar, Lone Star Plastics, Marck Recycling, and
von Drehle. The Wal-Mart SEEP energy management program frequently utilizes
upgrades lighting upgrades and energy efficient upgrade that typically will
qualify for the EPAct lighting tax deduction.

Nature and Resources

This set of sustainability nature and resource supplier assessment questions
is a sophisticated way to drive sustainability goals through the entire supply
chain. Tier 1 suppliers actually supply the final packaged good to be delivered
to a retailer like Wal-Mart. The tier 2 supplier provides the processed
materials used in making the final product, such as in our example below, a
frozen pizza maker will likely need several different suppliers in order to put
together the dough, sauce, toppings, and packaging to produce their product.
Tiers, in this concept, extend out as far as the supply chain goes, where each
lower tier is the direct suppliers to the tier above it. Ordinarily, it is
somewhat challenging for Tier 1 suppliers to probe into the affairs of their
own vertical suppliers. However, by requesting this step Wal-Mart, makes it
easier for the Tier 1 suppliers to do so. Tier 1 supplier should first consider
upgrading their own facilities before questioning their lower tier suppliers.
Vertical market sustainability inquires sometimes fleshes out sustainability
sandwich issues. A sustainability sandwich issue arises when the end user (say
Wal-Mart) and the second Tier supplier have achieved higher sustainability
including energy efficiency standards that the intermediate Tier 1 supplier.

100% Renewable Energy Goal

This 100% renewable energy goal is very challenging goal and one that
Wal-Mart itself is far from accomplishing. Presumably Wal-Mart intends to make
some major strides in this area. Logically Wal-Mart couldn't ask its suppliers
to seek to do what they haven’t done themselves. Wal-Mart stores
typically have very large rooftops that are particularly suitable for solar
P.V. On September 2010 Wal-Mart announced a meaningful expansion of thin film
solar P.V. projects in California and Arizona . Thin film solar is one of the
two major types of solar P.V. material, with crystalline being the other
category. Based on current technology, thin film has lower cost but also lower
efficiency.

Wal-Mart suppliers in California and New Jersey have an advantage in that
their local incentives combined with falling solar prices and 30% Federal tax
credits are providing an increasingly better economic return from solar.
Wal-Mart family members are founding investors of First Solar a major U.S.
solar panel company so Wal-Mart has deep exposure to solar panel technology
developments and the continuing decrease in the installed cost of solar.
Wal-Mart has a staggering amount of rooftop square footage approaching 500
million square feet.

Suppliers with large HVAC energy users may want to evaluate geothermal
systems where both 10% tax credits and EPAct tax incentives are available .
Suppliers with large amounts of refrigeration have very large electricity
consumption where fuel cells and 30% tax credits are also available.

Wal-Mart Supply Chain Characteristics

The largest categories of Wal-Mart suppliers presumably reflects
Wal-Mart’s store layout where two large major sectors are (1) apparel and
(2) food products. The supply chains for these two sectors will be different
with apparel containing numerous offshore manufacturers and food products
characterized by many domestic suppliers, including local suppliers of fresh
and organic foods. With the offshore apparel suppliers, ocean shipping is a
proportionally large energy user and emissions generator. The domestic food
products sectors have high energy building costs, especially for the
refrigeration aspects of running their facilities. The hypothetical diagram
below presents some of the major suppliers involved in providing a frozen pizza
to Wal-Mart or any grocers’ shelf along with sample facilities square
footage.

Wal-Mart Local Produce Commitment Program

Wal-Mart has also made a commitment as of October 14, 2010 to increase the
amount of produce bought from local farms to increase its fresh food offerings.
The company plans to double the percentage of locally grown produce it sells to
9%. Wal-Mart is a $405 billion dollar company where groceries account for
roughly half of its revenue. This will equate to a sizeable increase to the
number of Wal-Mart suppliers, who if they want to become part of the Wal-Mart
supply chain will need to reduce their own energy usage to become a more
attractive supplier choice.

The table below presents the EPAct potential tax benefits available to the
frozen pizza suppliers presented in the previous diagram.

Wal-Mart Tiered Supplier Chain

Potential Tax Deductions Available for energy Efficient Building
Improvements Under Current Legislation

Packaging System Waste Reduction

One of the major focuses with the zero waste supplier initiative is reducing
packaging

costs. Product packing cost is major cost category for virtually all
Wal-Mart suppliers. In addition to reducing the amount of packaging material
utilized major opportunities exist to automate packing systems with new
packaging equipment and to improve packaging processes and recycling. In
addition to major labor cost reduction opportunities the new packaging systems
reduce both production cycle time and often utilize less energy. Although there
are no tax incentives for energy efficient packaging equipment some utilities
offer custom rebates for these measures. Suppliers with unique products may
need to develop customized packing equipment where R & D tax credits may be
available. Lastly, many states offer tax credits and incentives for recycling
investments.

Integrating Programs

Those Wal-Mart suppliers that act on the four categories of designated
supplier initiatives will find themselves much better plat formed for achieving
the coveted LEED building status. The tax opportunities with LEED buildings
relate to the large number of LEED ratings points involving energy cost
reduction and alternative energy. Out of the 69 total LEED rating points, over
20 points relate to energy criteria, with 10 points specifically designed for
energy optimization . Additional LEED points are available for alternative
energy integration. Also those suppliers from California, Austin, Texas, New
York City, and Seattle will improve their benchmarking status in those
mandatory energy efficiency benchmarking jurisdictions .

Conclusion

The Wal-Mart Supplier Sustainability program is going to drive multiple
sustainability improvements through a deep supply chain. Facilities owners who
lease to Wal-Mart suppliers and suppliers who own their own facilities need to
understand Wal-Mart’s sustainability goals and use a variety of energy
related EPAct Section 179D and alternative energy tax credits and tax savings
opportunities to support these goals. Landlords who want to retain existing
tenants who supply Wal-Mart or with vacant facilities who want to attract
Wal-Mart suppliers also need to understand this supplier strategy and make it
their own strategy.